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Federal tax plan needs help to better benefit Northland

Speaker of the House Paul Ryan, House Majority Leader Kevin McCarthy and Rep. Cathy McMorris Rodgers hold a news conference Tuesday on the House tax plan. Washington Post photo by Melina Mara

If federal tax reform is signed into law as it has been proposed, local businesses could benefit big-time.

The average Duluth family, meanwhile, could end up paying more.

An analysis from the Minnesota Center for Fiscal Excellence shows that married couples with two children reporting $50,000 in income — that's about the median household income in Duluth — will save $36 on federal taxes but pay $188 more in state taxes under the House of Representatives proposal. Families making $100,000 and up will see their total tax bills fall.

"The impact of federal tax reform would make the state income tax system less progressive," the report says. "The GOP plan has the potential to expose more Minnesotans' income to the state's individual income tax rates."

That's if the Minnesota Legislature does nothing to respond to the biggest shift in federal tax policy in 30 years, should it come to fruition.

"It's going to highlight the need for changes at the state level," said Beth Kadoun at the Minnesota Chamber of Commerce, who pointed out the Reagan-era tax cuts were met with state-level changes. "It's going to make Minnesota's high individual tax rate more visible."

The easiest fix for those middle-income families, says Mark Haveman, executive director of the nonpartisan Minnesota Center for Fiscal Excellence, would be for Minnesota to keep a dependent exemption — which the federal plan does away with — and add in the new family credit.

"That same solution also works across the board, including for lower-income households," Haveman said, and those folks would be buoyed by the federal earned income tax credit staying in place.

His report said that individual tax situations "may differ wildly" among income levels and with different numbers of children and the number and types of itemized deductions. Those with more kids and larger deductions "will see less federal relief or possibly pay more because of reform."

As for business, cutting the corporate tax rate to 20 percent has been cheered on by some as a path to widespread economic growth.

"The United States' current corporate profit tax rate of 35 percent is obsolete, from a time before globalization, a growing China and NAFTA. It has to be cut," said Tony Barrett, College of St. Scholastica economics professor. "Locally, any company of any size will benefit."

The benefit, Barrett says, will come from reinvestments into machinery, labor and other capital in addition to profits sitting overseas coming back into the U.S. He said the cut is "long overdue and will help the economy over time."

But as with anything in capitalism, there will be winners and losers.

The National Federation of Independent Business initially opposed the tax reform plan as it was rolled out, since it called for 70 percent of income from pass-through businesses — 95 percent of all U.S. firms are classified as such, according to the Brookings Institution — to be taxed at the rate the business owner pays on an individual return.

Wisconsin Republican Sen. Ron Johnson told the Washington Examiner recently he's "completely opposed to that," as it could hurt manufacturers — and the Senate tax plan seemed to move away from the measure. That led the small business group to switch course and signal its support for bills in both chambers.

"It includes real tax relief, allowing small business owners to keep more of their money to invest in growth and create new jobs," said the NFIB.

There are still other side effects to the economic medicine as proposed, including a $1.5 trillion increase to the national deficit and tax incentives disappearing.

"Some of its cuts would have a direct negative impact on the region; the potential elimination of tax credits for new markets and historic building renovation would seriously hamper efforts to spur new investment and redevelop brownfield properties in the Northland," said Karl Schuettler, director of marketing, research and analysis at the Northspan Group in Duluth.

The Minnesota Chamber of Commerce has its own problems with some of the proposals but supports the goals that have been laid out.

"There's a lot of great things to like and some things to be modified as it moves forward," Kadoun said.

The House of Representatives is currently taking a red pen to its proposal, and Senate Republicans unveiled a bill of their own last week. While the goal is to pass some form of tax reform by the end of the year, the political deadline will ultimately be the midterm elections next November.

Sen. Al Franken said the GOP plan would be "bad news for Duluth, plain and simple."

"This misguided plan would threaten several key projects that Duluth is working on to improve its local economy — including the construction of new affordable housing options," the Democrat said in a statement to the News Tribune. "Not to mention that the vast majority of the benefits would go to the wealthiest Americans and large corporations."

Northeastern Minnesota's Democratic Rep. Rick Nolan said in a statement the House tax bill is "a scam."

"This bill is just plain old trickle-down economics — the myth that giving the rich extra billions will somehow benefit the middle class, which has never worked."